Fed report on consumer credit shows pace of card use falls
Total debt falls, debt slips to 'only' $969 billion
By Daniel P. Ray
Amid increasing evidence that credit cards -- one of the consumers' last borrowing lifelines -- are becoming tougher to get, Americans showed signs of putting away their cards, slowing their pace of spending in August, according to a Federal Reserve report released Oct. 7.
The news is contained in the Fed's monthly G.19 report on consumer credit. Consumer spending makes up about two-thirds of the United States economy, and consumer credit makes much of that spending possible, so the G.19 is a closely watched thermometer of consumer wellness.
Revolving debt, rate of spending down
Revolving debt, the category of spending that is almost entirely comprised of credit card debt, fell in August at an annualized rate of -0.8 percent. That's sharply down from July, when card spending rose at a revised annual rate of 5 percent. It was the first decline after three consecutive monthly increases. Total revolving debt fell as well, to $969.6 billion to $969 billion.
Credit card debt, spending down
As credit card debt continued its march toward the $1 trillion mark, nonrevolving debt was up sharply, too. The pace of spending on nonrevolving debt, which includes a variety of loans -- chiefly, auto loans, student loans and loans for mobile homes, boats or trailers -- fell even more sharply. It fell at an annual rate of -5.4 percent. The actual total of nonrevolving debt fell as well, by $7 billion, to a mere, to $1.608 trillion.
In total, debt fell to $2.58 trillion -- the first easing of total debt in a decade.
The latest report on consumer spending pattern comes in the middle of a credit crisis unseen since the Great Depression, with financial institutions folding, merging, or begging for bailouts.
"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," Bank of America Chief Executive Kenneth D. Lewis said Monday, reporting the banking giant's third quarter earnings had fallen 68 percent in the third quarter.
According to the Bank of America release, "Reflecting deteriorating economic conditions, the consumer credit card business experienced a decrease in purchase volumes, slowing repayments and increased delinquencies during the quarter." Net charge offs increased to $1.24 billion, representing a net charge off rate of 6.14 percent. Net credit card losses rose to $3 billion, representing a loss rate of 6.4 percent.
Consumers have reacted to the recent economic downturn by reining in discretionary spending. A CreditCards.com national survey published in August showed almost one-third of consumers say they are spending less on discretionary purchases, such as eating out and shopping at the mall, while a little less than half say they limited their purchases of major items, such as big appliances and furniture.
Even with such cutbacks, many have not been able to climb out of debt. While cutting back on extras, high fuel and food prices and flat wages have caused many to break out their plastic for everyday needs.
... (D)iscretionary spending is declining and spending on essentials, such as gas and food, is increasing due to higher prices.
-- Gary Crittenden
CFO, Citi
"We have seen a slowdown in our North American card purchase sales as we have tightened underwriting standards and where discretionary spending is declining and spending on essentials, such as gas and food, is increasing due to higher prices," Gary Crittenden, chief financial officer for Citi, told analysts during a conference call in July.
Banks have problems, too
Banks are having their own problems with shaky balance sheets. Those that issue credit cards are reacting by tightening credit card availability. That, one analyst predicts, will strangle another point of access for credit -- the ability of a consumer to transfer a balance to a new card.
"Banks are looking over their shoulders at Washington Mutual," which folded in September with a high percentage of its credit card assets in default, says Greg Larkin, senior research analyst for Innovest Strategic Value Advisors. "No bank wants to be compared to WaMu. Banks need to prove they can manage risk, limit delinquencies, and stabilize their balance sheets. That priority will discourage banks from pursuing distressed borrowers who want to transfer their balances."
The Federal Reserve, in a separate survey it released in August, also predicted credit card lending standards to continue to tighten through the rest of 2008 and into next year.
The estimate came through its quarterly Senior Loan Officer Opinion Survey, based on questionnaires filled out by officers of based on responses from 52 domestic banks and 21 U.S. branches and agencies of foreign banks.
In the survey, 67 percent of the respondents said that in the second quarter of 2008, they had tightened up on credit card lending by taking one or more of the following actions:
Reducing consumers' credit limits.
Imposing higher minimum credit score requirements to get a card.
Tightening terms and conditions on existing cardholders.
Boosting minimum payments.
Raising rates.
Tightening was even more prevalent at large banks, where 83 percent had tightened credit card lending standards. Not a single loan officer in the survey reported making credit cards easier to get.
Regarding credit card loans, about 60 percent of domestic respondents indicated that they expected their banks to tighten standards on these loans in the second half of 2008, and about 35 percent, on balance, thought that their banks would tighten such standards on these loans in the first half of 2009.
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